Apple isn’t buying Netflix any time soon

Alex Kidman 3 January 2018 NEWS

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Rumours insist that Apple might be opening up its massive war chest to acquire Netflix, but like most rumours, there's more fancy than fact at play here.

Apple attracts rumours like an Aussie BBQ attracts flies, so it's not unusual to see plenty of speculation surrounding one of the world's biggest tech companies. The very first rumour of 2018 just so happens to align Apple with one of the world's other favourite brands, Netflix.

As per the rumours, Apple is allegedly "40% likely" to buy Netflix in its bid to expand its media empire. At which point my own mental BS detectors start firing up, sirens blaring at full. 40% according to Tim Cook, or 40% according to somebody less in tune with Apple's buying plans?

It turns out it's the latter, with the rumour apparently being courtesy of analysts at Citi. In other words, it's at best an educated guess, and at worst complete speculation designed to grab headlines.

But let's pause that line of thinking for a moment, and step back a little. Why would Apple buy Netflix? What would it gain and why would it even be interested?

Content is king, and Netflix wears the crown

The most obvious reason for Apple to be interested in buying up Netflix would, obviously, be the massive library of content that Netflix has access to, both in the form of its own original content and the licensing deals that it's carefully negotiated over the years.

Buying Netflix would grant Apple immediate access to everything from high-end drama such as The Crown to less intellectual fare like Ultimate Beastmaster. Apple is all too well aware of how entertainment content can help sell the hardware that actually underpins Apple's astonishing profitability.

I've been writing about technology long enough to remember full well when Apple seemed like it might become one of those cute footnotes in technology history as it faded away against the Microsoft Windows monolith. Back in the late 1990s, Apple was releasing product after product that failed to hit the mark, at least as far as consumers were concerned.

Sure, the Power Mac G4 Cube was a cute-as-hell box computer with a lot more design apparent in it than the beige boxes that everyone else was shifting back then, but it also lacked a critical market to actually sell to. That's rather vital if you want to stay in business, and for a long time, it seemed as though Apple was heading towards extinction. The only real question was when the fire sale might start.

It was the iPod and the intense popularity of iTunes as a legitimate music delivery service that brought Apple back from the brink of disaster. From discussions with Apple employees, the period immediately beforehand was a grim time to be an Apple employee, and I'm certain that Apple has no desire to become irrelevant due to lack of content in its iOS and macOS ecosystems.

On that level, buying Netflix might seem like a no-brainer for Apple, because while it has competitors such as Amazon Prime Video or Hulu (in the US) and locally grown alternatives such as Foxtel Now or Stan locally, Netflix is still the brand name.

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Apple is a company that tightly controls the companies and ideas it buys and were it to buy Netflix, it would immediately have tight control over a whole lot of entertainment that it could (presumably) fold into a complete streaming solution alongside Apple Music. Win-win, right?

Not so fast.

It wouldn't be cheap

Current market valuations suggest that Netflix is "worth" something around US$88 billion, give or take a dollar or two. That's not small money, but then Apple isn't exactly a titchy company.

Still, a purchase at that scale would dwarf what Apple's previously paid for companies such as Beats, or what it's allegedly paying for Shazam by a significant degree.

Apple's war chest is deep, mostly buried in offshore accounts to avoid tax liabilities. Part of the story around the Netflix acquisition rumour rests on the idea that tax changes in the US would make it easier for Apple to move its money vaults back stateside. That would, in turn, make it simpler to spend up big.

Apple would indeed have to spend big for Netflix, over and above US$88 billion by a likely very steep margin. Any real indication that it was making such a move would spike share prices and speculation, which would easily shift the price Apple would have to pay north of US$100 billion and then some.

Apple didn't get a large war chest by spending money, but by hoarding it carefully and cutting very fine deals with suppliers. Apple sells at a premium, but many reports suggest that canny negotiation means that it often buys components for its hardware at serious discounts.

Well, except for maybe the iPhone X, where the high asking price is apparently due to Apple going cap in hand to Samsung for OLED panels. But I digress.

But again, let's say that the allure of having the power to delete that regrettable first season of Iron Fist from history is too alluring for Tim Cook to resist, and he can somehow convince the Apple board of directors to spend up big on Netflix. There's an even bigger problem that makes a buyout of Netflix a bigger problem for Apple.

Apple is one ecosystem, but Netflix is everywhere

A huge part of the appeal of Netflix is that you can watch programming on just about any device, whether you favour a mobile phone, tablet, computer, console, set-top box or smart TV.

Local streaming services have had to scramble to get apps ready for multiple devices, but at launch here in Australia, Netflix could boast of multi-device compatibility from the get-go.

For Netflix, this makes an immense amount of sense because it doesn't want to miss out on a customer (or lose one) because they can't get their streaming fix.

However, this is the exact opposite of the way that Apple operates. Not that it wants to lose customers, but that it wants to provide services to all on every single platform.

Apple's ecosystem is always described as a "walled garden" for a reason, and that's because Apple recognises that by keeping users within just a few devices and options, it can both control purchases and optimise experiences.

Apple gear can wear that "it just works" banner because it controls the experience so precisely, and it does that by locking it away.

Were Apple to buy Netflix, it would be faced with a tough choice.

Either it commits to supporting a huge range of platforms, many of which directly compete with its existing devices over the long term, as Netflix currently does (that's going to be a major headache for Apple, especially if over the medium to long term its own hardware sales falter); or it locks Netflix away behind an iTunes wall, making it a more exclusive choice.

The latter is a very Apple way of thinking, and one that the Amazon Prime Videos, Hulus, Stans and others would salivate over, because it would instantly make them more appealing to a wide range of consumers who might not have an investment in any Apple gear, or who may simply favour watching Netflix on their PlayStation 4 rather than their iPhone 8.

Ultimately, Apple buying Netflix makes for a great attention-grabbing headline, but it's an expensive gambit that doesn't appear to fit well within Apple's established business methods, both in terms of what it usually pays and in the way it conducts business as a whole. Nothing is impossible, but that "40% chance" seems like a long shot at best.

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